Annual Review of the Company Retirement Fund -- July 2007

Prioritise an Annual Review of Your Company's Retirment Fund

In the light of changes in the legislative framework surrounding retirement funds and lump-sum benefits, it is important to review the structure and benefits of a retirement fund.

Many of our clients are diligent about coming to a review of their personal financial planning but in many cases the retirement funds to which they belong never get near an annual review.

With more and more companies offering cost-to-company packages with investment choice, it is imperative employers and employees are informed about all aspects of their retirement fund.

It is often overlooked that for most employees, their assets in their retirement fund will be their only long-term savings.

Many employers put a retirement fund in place and because it is not their core business, the fund is left to look after itself and may be neglected.

Much like a personal financial plan, a retirement fund needs an annual review. This would necessarily include report-back sessions to management and staff. The need for frequent, accurate reporting and full disclosure will ensure that it would be difficult to hide inappropriate investments and additional costs.

Many companies with “stand-alone” retirement funds (as opposed to “umbrella” retirement funds) need to have employee-nominated trustees: half the trustees have to be nominated by the employees, and the other half by the employer.

These trustees are legally responsible for the smooth running of the fund and for ongoing investments. Many employers do not take the role of trustee but rather nominate trustees.

Some of the biggest umbrella funds in SA belong to the one-stop shops, with one firm providing all or a majority of the roles on the umbrella fund.

This represents a serious governance risk with potential conflicts or interests.

It is critical that the roles of the employee benefit consultant, administrator, asset manager, actuary and investment consultant are not all filled by the same company and are independent of one another.

The Financial Services Board has taken a tough stance on governance by promulgating PF 130, which details all the steps boards of management need to implement in their funds to ensure sound governance.

Boards of management that do not adhere to the PF 130 requirements run the risk of not meeting their fiduciary obligations.

Irrespective of whether your firm operates as a standalone fund or is part of an umbrella fund, we would advocate the use of an independent employee benefit consultant to offer independent counsel at all trustee meetings to ensure the above issues are appropriately dealt with.

On all funds the following should be reviewed annually:

• Members
  Is all the members' information correct?
• Costs
  Has the fund been put out to tender? Have all service providers' costs been discussed and formally agreed upon?
• Structure
  Is the retirement fund’s design structure appropriate for the membership (pension fund/provident fund/retirement annuity)? Has risk structure been discussed (approved/unapproved cover)? Has the fund been correctly treated for tax purposes?
• Benefits
  Are current risk benefits appropriate? Have other risk benefits and their costs been discussed?
• Investment Is there a strategy review? A performance review? Are there members close to retirement where a change in strategy is appropriate?

If you feel that a proper annual review process has not been undertaken on your company's fund, we recommend the appointment of an independent employee benefit consultant to put this in place.

Netto-Jonker, CFP, is founder of Netto Financial Services and was financial planner of the year in 2001. Her colleague and partner, Ian Beere, BCom BCompt (Hons) CA (SA) CFP, was recently elected financial planner of the year for 2007.